Capital Economics: “Brazil more vulnerable now to another crisis”

According to Capital Economics, Brazil and India are increasingly vulnerable to another crisis or to the eventual end of the ultra-loose monetary policies in developed economies.

Weak demand for Brazil’s exports and the voracious appetite of local consumers for imported goods widened the country’s current account deficit to 2.93 percent of GDP in the 12 months through March, the widest gap in nearly eleven years. In dollar terms, that amounts to $67 billion.

To help fund this gap, Brazil could at first loosen the currency controls adopted in the past few years and let more dollars in. But if the dollar flows change too swiftly, Brazil would find itself with three other options: curb spending by growing less, allow a decline in the foreign exchange rate at the risk of fueling inflation, or burn part of its international reserves – which are large, at $377 billion, but not infinite.

Such an outlook could get even more challenging if commodities prices drop further – and last week’s tumble in many products sent a reminder of how volatile these markets can be, hurting not only Brazil but many other Latin American exporters.

”Whereas the region entered the 2008-09 global financial crisis from a position of relative strength, it is now much more vulnerable to another external shock,” said David Rees, emerging markets economist at Capital Economics, in London.